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Friday, 25 March 2011

Kerzner International Holdings Ltd., the company that built Atlantis resorts in the Bahamas and Dubai, faces a loan covenant test that may trigger a default as soon as next month, people with knowledge of the matter said.

The company, which also runs seven One&Only resorts, may fail the test on an estimated $450 million loan, said the people, who sought anonymity because the situation is private. Centerbridge Capital Partners LP and TPG Capital are among the largest holders of the debt, which is backed in part by management contracts and equity in some properties, they said.

A default on so-called operating company debt may lead to the refinancing of Kerzner’s $3 billion total debt, asset sales or ownership changes, according to the people. The company, whose owners include Dubai World’s Istithmar, Goldman Sachs Group Inc. (GS)’s Whitehall Funds, Colony Capital LLC and founder Sol Kerzner, has struggled with debt since the 2008 financial crisis sank hotel values and reduced room rates.

Spring is not quite here yet for emerging market funds. Money flowed out of emerging market funds at a faster rate this week than last, as investors continued their move into developed market equities. Investors shifted $2.7bn out of EM equity funds in the week to Wednesday, says EPFR, the research company. Meanwhile, developed market funds saw a record $637m of inflows this week.

EM equity investors remained restless with a wall of worries, but concerns appear to have shifted to growth from inflation. Outflows for the week ended Wednesday were US$2.7bn (0.4%AUM), slightly higher than the previous week. Asia ex-Japan and Latin America saw accelerated outflows whereas CEEMA improved to receive some new money. Global International funds recovered to a positive flows trend, driven by ETF buying. This suggests that the sell-off in equities has probably moderated from the week right after the Japan earthquake, but the focus was on DM equities.

There was one bright spot: Russia. Last week’s exodus from Russia-dedicated funds proved to be temporary; this week they saw inflows of $289m.

Chris Weafer of Uralsib, the Russian bank, told beyondbrics that with uprisings in the Middle East and North Africa rumbling on and pushing up the price of oil, we could expect to see “[the] trend of investors diversifying into Russia as an energy hedge within EM, particularly focusing on energy stocks.” Brent and WTI oil prices are at nearly two and a half year highs. Brent crude for May delivery was $115.58 and Light Crude 104.92 midday Friday.

Saudi Arabia’s concerns about regional stability and its domestic vulnerabilities have risen to the fore amidst protests in neighbouring Bahrain, Oman and Yemen as well as in its own Shia-populated and oil-rich Eastern Province. With protests spreading from North Africa to the Gulf, Saudi Arabia announced a financial aid package of about US$ 36 billion for its citizens, promising more jobs, pay hikes, scholarship for students, and so on. Sensing trouble in its Eastern Province, the government banned all protests in the Kingdom. With the situation deteriorating further in the neighbourhood, King Abdullah addressed the nation and announced another multi-billion dollar package, which included creating 60,000 jobs in the security forces and 500,000 new homes, to appease his citizens.

Oil is the main strength of the Gulf economies and massive oil revenues have provided rulers with the resources to consolidate their regimes and to gain legitimacy from the people by distributing wealth. Thus, the uninterrupted production and supply of oil has a domestic political connotation too, as it serves as the lifeline for these rulers. In the event of oil production and supply getting disrupted, it will not only affect the national economy, but also undermine regime stability. This is another reason why Saudi royals are concerned about the spread of popular protests in the Eastern Province as well as in the Gulf region.

Saudi Arabia

Saudi Arabia’s principal domestic challenge is discontent in its Eastern Province among the Shias, who constitute around 15 per cent of the total population. The majority of the Kingdom’s oil fields are located in this province. Thus, any protests or instability there may disrupt the production and supply of oil. Small scale protests were reported in the Shia-dominated areas of Hufuf, Awwamiya and Qatif, where protesters demanded the release of the arrested Shiite cleric Tawfiq Al Amir. On several occasions in the past, the Shias of the Eastern Province have protested against political and economic inequality; in particular, they have raised the issue of members of their community not being appointed to the top ranks of the military, police, bureaucracy and the Consultative Council (Majlis al-Shura), as well as about not economically benefiting from the country’s huge oil wealth. Shias also oppose religious discrimination as practiced by the Saudi ruling family, which follows the Sunni Wahhabi puritanical version of Islam with its disdain for Shias. For decades, Shias have been forbidden from performing their religious practices, publishing their religious materials and publicly celebrating their religious functions in the Kingdom.

France's Thales (TCFP.PA) said on Friday it was close to agreement with the United Arab Emirates on the offset rules in possible arms contracts after a diplomatic row was disclosed by a French newspaper.

La Tribune daily reported that French diplomats had warned Thales that French interests were at risk over the company's stand on offsets, or counter-trade, as France campaigns to sell Rafale warplanes to the Emirates. [ID:nLDE72N2B0]

"This negotiation has been going on for several months and like all negotiations has experienced some highs and lows. We are currently in a state of convergence," a Thales spokesman said, adding the company was surprised about the leak.

Uganda's central bank said on Friday it would appoint new members to the board and management of Libyan-owned Tropical Bank to ensure it is not under the sway of the north African nation's government.

The central bank, or Bank of Uganda (BoU), said the measure would be in compliance with U.N. sanctions and would ensure Tropical Bank could continue to operate as a commercial bank.

"Bank of Uganda has taken a series of measures which are designed to ensure the management of Tropical Bank is fully independent of the Libyan government ... and that it transacts no business with the Libyan government," said Central Bank Governor Emmanuel Tumusiime-Mutebile.

Qatar National Bank (QNB) Group Chief Executive Officer yesterday called on GCC banks to integrate. Speaking on behalf of Qatari banks at the 10th GCC Banking Conference, Ali Shareef Al Emadi told participants, “Banks in the region are relatively small compared to institutions in many other parts of the world. To overcome this, we must consider integrating the banking sector of the region to not just increase access to markets but also encourage consolidation.”

“This will be a challenge not just for regulators but will also require extensive consultation and deliberation within the region’s financial system to facilitate such mergers and acquisitions,” he said.

He also said that the global financial crisis has brought to light the important and indispensable role of regulatory bodies in maintaining the stability and integrity of the financial sector across the world. He added that this crisis has also brought into sharp view the role of an effective governance system and prudent risk management.

Shares in Woori Finance Holdings (053000.KS) jumped nearly 3.6 percent on Friday on a local media report a United Arab Emirates sovereign fund may buy a stake in the firm.

"The report buoyed appetite for the shares as such a stake purchase would ease some overhang issues," said Ku Yong-uk, a market analyst at Daewoo Securities.

Seoul has agreed to sign a "give-and-take" deal with Abu Dhabi to help the fund purchase a stake in a local lender in exchange for securing rights to oil fields there, the Korea Times reported on Thursday, citing a source close to South Korea's presidential office.

The wave of political strife enveloping the Arab world has rattled Gulf merchant families, businessmen and royals, leading many to move more of their personal wealth into offshore havens and assets.

Aside from Bahrain, where the government has bloodily suppressed an uprising by its Shia majority, and Oman, the Gulf has not seen significant unrest.

Nonetheless, those investing the wealth of Gulf merchant families and royals have become more risk averse, and shifted capital into havens such as Switzerland and the UK and liquid offshore assets such as high-grade bonds, private bankers said.